UK – Contractors and freelancers told “pay back-taxes now, argue later”

Contractors and freelancers who have been told by Her Majesty’s Revenue and Customs’ (HMRC) Accelerated Payments Team that they owe back-taxes, are being given 90 days to pay even if there is a dispute about whether or not there is an existing debt, reports The Telegraph.

As part of new powers introduced last summer, HMRC can demand that individuals pay tax within 90 days, with added penalties and charges if they are suspected of abusing legitimate tax reliefs. If a court later decides that HMRC’s calculations are incorrect, the money will be returned.

Jennie Granger, Director of Enforcement at HMRC, commented: “Tax avoiders are running out of options. People now have to pay upfront and dispute later.”

Initially intended as a means to pursue tax avoidance by wealthy investors, HMRC is accused by the Telegraph of targeting more moderately well-off individuals who are only now being told to pay back-taxes from jobs they held years ago.

Director of Legal and Regulatory Research at Staffing Industry Analysts, Fiona Coombe, said: “Freelancers using creative tax avoidance schemes that seem too good to be true shouldn’t be too surprised to find that HMRC comes looking to recover unpaid tax. We have seen in the past that legislation evolves to curtail the more aggressive forms of tax avoidance and freelancers would be well advised to take this into account when organising their tax arrangements.”

One freelance worker targeted by HMRC has been ordered to pay £27,900 in back-taxes relating to a job he held seven years ago. Between 2008 and 2010 he worked in various London banks. During that time he received a letter from HMRC advising him that it was looking into his tax affairs and would “let him know” if anything was untoward.

Five years passed before he was advised in April 2015 of the outstanding balance.

According to The Telegraph, HMRC’s brief notification in 2010 was enough to open an “inquiry” meaning that it can sidestep any statute of limitations with regard to demanding payment.

A current rule, known as “Schedule 39”, means that HMRC can only go back four years, unless it can prove that the loss of tax was due to “careless” behaviour on the part of the taxpayer or agent, in which cast the time-limit becomes six years. If there is a loss of tax due to deliberate behaviour on the part of the taxpayer or agent that timeframe extends to 20 years.

To date, HMRC has received £1 billion from taxpayers who have received notifications from the Accelerated Payment Team. Much of this money, however, is expected to be refunded.

Telegraph Money had reportedly heard from numerous freelancers, mostly working in computing, banking, and the oil & gas sectors in the late 2000s, who are only now being informed by HMRC that their tax affairs had been classified as “aggressive avoidance”.

Most of the freelancers affected earned annual salaries between £60,000 and £80,000 and are being told that they owe sums that are the equivalent of their yearly wage – within 90 days.

Dominic Arnold of accountants Moore Stephens, who has several clients dealing with accelerated payments, said: “HMRC insisted these powers wouldn’t be used disproportionately. The message was very clear that they would be issued to people who can afford it, which masks the reality that thousands of people are being caught who haven’t got the funds to pay an accountants – let along challenge the sums in court.”

HMRC’s campaign concerns the thousands of former freelancers who used what are now deemed to be controversial “employment benefit trust” schemes, which were sold and operated by large companies.

Approximately 22,300 freelancers were marketed these schemes as an alternative to setting up a limited company in their own name. The majority were contracted workers in IT and financial services, who would move from workplace to workplace every few months.

The schemes provided an alternative to taking an income through a limited company, sometimes known as “personal service companies”. Many of the arrangements were perfectly legitimate and met HMRC’s definition of a genuine contractor and not an employee.

However, a large number of freelancers took up contractor loan arrangements in an effort to sidestep the IR35 self-employment legislation and avoid the administrative burden of owning a company.

In the schemes, employers pay the worker’s salary into an offshore intermediary, which takes a commission, before paying this money to the worker in the form of a tax-free loan. The freelancers could pay as little as 5% in tax, with the rest pocketed by the company.

HMRC now says it regards such tax avoidance schemes as being “particularly aggressive”.

It is relatively easy for HMRC to identify the freelancers who used these offshore schemes because the companies are required to disclose it on their tax returns, with a “Disclosure of tax avoidance scheme” or “Dotas” number.

HMRC has now issued a list of 1,200 Dotas numbers – corresponding to various avoidance schemes – whose users will be issued with accelerated payment notices.

“This makes the freelancers low hanging fruit, in HMRC’s eyes,” said Lucy Brennan a tax adviser at Saffery Champness. “If they can grab thousands of workers with just one Dotas number, it will be worth just as much as forcing one millionaire investor to pay.”

Asked why it took so long for HMRC to act, Ms Brennan explained: “We’re in a different era now. Before 2008, these loan arrangements were popular but HMRC didn’t have the resource to crack down on them. Then the recession came and it all changed – the Treasury needed more money and this new power provided the opportunity to pursue years of backdated taxes.”